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To cut through some of this confusion surrounding bitcoin, we need to divide it into two components. On the one hand, you've got bitcoin-the-token, a snippet of code which represents ownership of a digital concept type of like a digital IOU. On the other hand, you have bitcoin-the-protocol, a distributed network that maintains a ledger of balances of bitcoin-the-token.
The system enables payments to be sent between users without passing via a central authority, like a bank or payment gateway. It's made and held electronically. Bitcoins arent printed, like dollars or euros theyre produced by computers all around the world, using free software.
It was the first instance of what we today call cryptocurrencies, a growing strength category that shares some characteristics of traditional currencies, with verification based on cryptography.
A pseudonymous software developer going by the name of Satoshi Nakamoto suggested bitcoin in 2008, within an electronic payment system based on mathematical proof. The idea was to generate a means of exchange, independent of any central power, that may be transferred electronically in a secure, verifiable and immutable manner.
Bitcoins most important characteristic is that it is decentralized. No single institution controls the bitcoin network. It's maintained by a group of volunteer coders, and run through an open network of dedicated computers spread around the world. This brings individuals and groups who are uncomfortable with all the control that banks or government institutions have over their money. .
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Bitcoin solves the double spending problem of electronic currencies (in which electronic assets can easily be copied and re-used) through an ingenious combination of cryptography and economic incentives. In electronic fiat currencies, this function is fulfilled by banks, which gives them control over the traditional system. Together with bitcoin, the integrity of the transactions is maintained by a distributed and open network, owned by no-one. .
Fiat currencies (dollars, euros, yen, etc.) have an unlimited supply central banks can issue as many as they want, and can attempt to manipulate a currencys worth relative to other people. Holders of this currency (and especially citizens with little alternative) bear the price.
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Together with bitcoin, on the other hand, the distribution is closely controlled by the underlying algorithm. Even a small number of new bitcoins trickle every hourand will continue to do so at a diminishing rate until a maximum of 21 million has been reached. This creates bitcoin more attractive as an asset in theory, if demand check grows and the distribution remains the same, the value will increase. .
Even though senders of traditional electronic payments are usually identified (for verification purposes, and to comply with anti-money laundering and other legislation), users of bitcoin in theory operate in semi-anonymity. Since there's absolutely no central validator, users do not need to identify themselves when sending bitcoin to another user. When a transaction request is submitted, the protocol checks all prior transactions to confirm that the sender has the necessary bitcoin in addition to the ability to send them.
In practice, each user is identified by the address of his or her wallet. Transactions can, with a little effort, be tracked this way. Also, law enforcement has developed methods to identify consumers if necessary.
Additionally, most exchanges are required by legislation to perform identity checks on their clients before they are permitted to buy or sell bitcoin, facilitating another way that bitcoin utilization can be tracked. Since the network is transparent, the progress of a specific transaction is observable to all.
This is because there is no central adjudicator that can say ok, return the money. When a transaction is recorded on the network, and when more than an hour has passed, then it is not possible to change.
While this may disquiet a few, it does mean that any transaction on the bitcoin network cannot be tampered with.
The smallest unit of a bitcoin is called a satoshi. It is one hundred millionth of a bitcoin (0.00000001) in todays prices, about one hundredth of a cent. This could conceivably enable microtransactions that traditional electronic money cannot.
Bitcoin is an electronic currency, also known as a cryptocurrency. It had been invented in 2008 with an anonymous person or group named Satoshi Nakamoto.